what is credit scoring

Consumer Credit Scoring Workshop

Today’s programmeToday’s programme

• Introduction to credit scoringIntroduction to credit scoring

• Overview of Experian’s bureau data and how Overview of Experian’s bureau data and how it influences a credit scoreit influences a credit score

• Reviewing and underwriting an application Reviewing and underwriting an application for credit for credit

• The key implications of the Guide to Credit The key implications of the Guide to Credit Scoring 2000 and how to deal with declinesScoring 2000 and how to deal with declines

• Overview of why monitor scoring?Overview of why monitor scoring?

IntroductionsIntroductionsSetting today’s objectivesSetting today’s objectives

Consumer Credit Scoring Workshop

Introduction to credit scoringIntroduction to credit scoring

Overview of credit scoringOverview of credit scoringCommon questions…Common questions…

• What is credit scoring?What is credit scoring?

• Why use credit Why use credit scoring?scoring?

• How we use credit How we use credit scoring within our scoring within our business? business?

• When do we use When do we use bespoke and generic bespoke and generic scorecards?scorecards?

??

?

What is credit scoring?What is credit scoring?

Credit scoring calculates the Credit scoring calculates the statistical probability that an statistical probability that an account will fall into arrearsaccount will fall into arrears

Bad Rate

Credit scoring calculates the statistical probability that an account will fall into arrears

What is credit scoring?What is credit scoring?

Low HighScore

Residential status # Searches last 6 months

Owner +27 0 +17

Renter -15 1 0

L.W .P. 0 2 -27

3+ -51

Age of applicant Telephone no. given

to 20 -19 Yes +15

21 - 25 -10 No -15

26 - 40 0

41 -65 +23

66+ Policy reject Plus many others

Example ScorecardExample Scorecard

Why use credit scoring?Why use credit scoring?

• Increased confidence in the decision process

• Added automation in decision process - objective and consistent

• Reduce arrears

• Reduce bad debt/write off

• Improve quality of portfolio

• Improve profitability of business

Some benefits of scoring for a business …

Use of…Use of…

All scorecards are built using Sigma, Experian’s state of the art scorecard building and analysis tool

• Score by Score by good/bad good/bad oddsodds

Score

Good BadOdds

How to use credit scoring


• Score by Score by good/bad good/bad oddsodds

• Marginal Marginal profitprofit

Use of…

Score

Good BadOdds

800

5:1



• Score by good/bad odds

• Marginal profit

• Setting a cut-off

Score

Good BadOdds

800

Decline Accept

Use of…



• Score by good/bad odds

• Marginal profit

• Setting a cut-off

• Tailor services Terms Marketing Services Interest rates

Score

Good BadOdds

Decline Accept

Low Limit

No Promotion

Refer

AverageTerms

Promote RegularPromotion

750 850

MaximumFacilities

Use of…


Score

How to use credit scoring Example: Motor Finance

Score

Good BadOdds

0 1 2 3 4

DeclineDecline

Max Loan Max Loan £5,000£5,000Max Terms Max Terms 36 months36 monthsInterestInterest 15% 15%

Max Loan Max Loan £10,000£10,000Max Terms Max Terms 36 months36 monthsAprApr 12.5%12.5%

Max Loan Max Loan £15,000£15,000Max Terms Max Terms 48 months48 monthsAprApr 10%10%

Max Loan Max Loan £25,000£25,000Max Terms Max Terms 48 months48 monthsAprApr 8%8%

0

1

2

3

4

SCORINGSCORING

GENERICGENERIC

Bespoke scoringBespoke scoring

• Clients specific Clients specific scorecardscorecard

• Large sample (>2,500 Large sample (>2,500 goods, bads, goods, bads, indeterminates and indeterminates and declined accounts)declined accounts)

• 2 years history required2 years history required

• DelphiDelphi included as a included as a scorecard characteristicscorecard characteristic

Who for ....

BESPOKEBESPOKE

Generic scoringGeneric scoring

• New products

• Evolving markets

• Small portfolios

• Limited data for analysis

• Fast implementation

Who for....

SCORINGSCORING

GENERICGENERICBESPOKEBESPOKE

PUBLICINFORMATION

FILE

Combining elements of Combining elements of

Europe’s largest credit Europe’s largest credit

bureau to provide bureau to provide

one simple highly predictiveone simple highly predictive

DelphiDelphi SCORE SCORE

Europe’s largest consumer Europe’s largest consumer databasedatabase

Experian’s bureau data used Experian’s bureau data used in credit scoringin credit scoring

PUBLICPUBLICINFORMATIONINFORMATION

FILEFILE

Experian bureau dataExperian bureau data

Key bureau questions

Is your applicant confirmed

on the electoral

roll?



on the electoral

roll?

Does your applicant have any

CCJs? If so how recent and for how

much?



on the electoral

roll?



much?

How is your applicant paying his CAIS accounts? Are they in arrears or in default? Does you applicant have lots of new CAIS accounts?


Has your applicant been applying for credit

recently? How often and for what type of credit?


on the electoral

roll?



much?

How is your applicant paying his CAIS accounts? Are they in arrears or in default? Does your applicant have lots of new CAIS accounts?


Has your applicant been applying for credit recently? How often and for what type of credit?


on the electoral

roll?



much?

How is your applicant paying his CAIS accounts? Are they in arrears or in default? Does your applicant have lots of new CAIS accounts?

CREDIT SCORE


… … introducing Mr Jonesintroducing Mr Jones

47 years old

Married Home owner

17 years at

current address

How bureau characteristics How bureau characteristics affect the score?affect the score?

Default Default score score 800800

• Most comprehensive address database in the Most comprehensive address database in the

UKUK

• 24 million addresses24 million addresses

• Validates postcode and addressValidates postcode and address

• Updated every 13 weeksUpdated every 13 weeks

Is the address traceable?Is the address traceable?

• Helps to confirm the names and addresses of UK resident Helps to confirm the names and addresses of UK resident voters voters

• Collated from 462 local authorities annuallyCollated from 462 local authorities annually

• October 10 is the “cut-off“ dateOctober 10 is the “cut-off“ date

• Are they on the voters roll at their Are they on the voters roll at their current or previous address?current or previous address?

Is your applicant living at the Is your applicant living at the address declared and for how address declared and for how long?long?


+ 30 + 30 pointspoints


• 31 types of public information31 types of public information

• Information held for six years from date of entry Information held for six years from date of entry

• How recent are the CCJs and for how much?How recent are the CCJs and for how much?

• Risk indicatorRisk indicator

Are there any records of public Are there any records of public information for your applicant?information for your applicant?

PUBLICINFORMATION

FILE



- 200 - 200 pointspoints


Is there a fraud warning Is there a fraud warning attached to your applicant’s attached to your applicant’s address?address?

• The decision initially must be a The decision initially must be a REFERREFER

• Established in 1988 to share fraud experiencesEstablished in 1988 to share fraud experiences

• Warning attached to an address - fraudsters often Warning attached to an address - fraudsters often use different namesuse different names

• Obtain details from supplying memberObtain details from supplying member

• 9 categories of fraud eg. 9 categories of fraud eg.

- empty house = 1- empty house = 1

- impersonation = 2- impersonation = 2

• Experian host the informationExperian host the information

CIFAS The UK’s Fraud Prevention Service

• Launched in 1983 - promote responsible lendingLaunched in 1983 - promote responsible lending

• Information provided on the: borrower, lender, credit accountInformation provided on the: borrower, lender, credit account

• 4 types of accounts - 4 types of accounts - Active, Settled, Default and DelinquentActive, Settled, Default and Delinquent

• Characteristics looked at for exampleCharacteristics looked at for example

Active account arrears > 3 monthsActive account arrears > 3 months

High number of recently opened accountsHigh number of recently opened accounts

High outstanding balanceHigh outstanding balance

No active accounts in arrearsNo active accounts in arrears

• Updated monthlyUpdated monthly

How has your applicant been conducting their financial affairs?(Credit Account Information Sharing)




- - 150 150 pointspoints


Has your applicant had their Has your applicant had their house repossessed?house repossessed?

• Established in 1989Established in 1989

• Repossession registerRepossession register

• Closed user group Closed user group

• Provides application addressProvides application address

• May provide forwarding May provide forwarding addressaddress

• Records are retained for 6 Records are retained for 6 yearsyears

• Record of previous credit searches within the Record of previous credit searches within the last 12 monthslast 12 months

• Application information on:Application information on:

ApplicantApplicant

Application detailsApplication details

• Helps to identify over-omitted and fraudulentHelps to identify over-omitted and fraudulentapplicationsapplications

How credit active is your How credit active is your applicant?applicant? (Credit Application Previous Search)



- 200 points







Delphi score Delphi score = 400 = 400

• Identifying financial associations through:Identifying financial associations through:

- Joint applications for credit- Joint applications for credit

- Joint accounts- Joint accounts

• Is your applicant known by any Is your applicant known by any other name?other name?

- Maiden name- Maiden name

• Supplied by you the lenderSupplied by you the lender

Are there any financial associations Are there any financial associations or aliases for your applicant?or aliases for your applicant?

Guide to Credit Scoring 2000Guide to Credit Scoring 2000and the art of rejectionand the art of rejection

Notification and consentNotification and consent

• Lenders are encouraged to tell Lenders are encouraged to tell applicants that credit scoring may be applicants that credit scoring may be used as part of the decision making used as part of the decision making processprocess

• Lenders by law Lenders by law mustmust have have consent from a consumer consent from a consumer before carrying out a credit before carrying out a credit searchsearch

No consent

Notification and consent.

I/we agree that the Acceptance Bank may search the files of a credit reference agency which will keep a record of that search.

Details of how I /we conduct the account may also be disclosed to the agency.

This information may be used by other lenders in assessing applications from me/us and members of my/our household and for occasional debt tracing and fraud prevention.

Data protection guidance on credit referencing

Consent - saying “yes” to...Consent - saying “yes” to...credit searchcredit search

storing datastoring data

sharing of informationsharing of information

prevention of fraudprevention of fraud

customer managementcustomer management

YES

The art of rejection - how to say The art of rejection - how to say “no”“no”

Written or verbal declinesWritten or verbal declines

• Tell them credit scoring has been usedTell them credit scoring has been used

• Provide a simple explanation of how it worksProvide a simple explanation of how it works

• Provide a principal reason for declineProvide a principal reason for decline

- - Without jeopardising the security Without jeopardising the security of your scorecard of your scorecard

oror

- Running the risk of fraud- Running the risk of fraud

1.1. How would you How would you explain to a customer explain to a customer what credit scoring is?what credit scoring is?

2.2. List reasons as to why List reasons as to why you may decline an you may decline an applicant.applicant.

Group exercise

Explanations of credit Explanations of credit scoring and how it works...scoring and how it works...

• Credit scoring measures the statistical Credit scoring measures the statistical probability that credit will be satisfactory probability that credit will be satisfactory repaidrepaid

• Credit scoring systems allocate points to Credit scoring systems allocate points to various pieces of information given on your various pieces of information given on your application form such as your age, whether application form such as your age, whether you own your home and to information you own your home and to information provided by a CRA. These points produce your provided by a CRA. These points produce your credit score and help to predict whether you credit score and help to predict whether you are an acceptable riskare an acceptable risk

Principal reasons for declinePrincipal reasons for decline A decline based on a low credit score A decline based on a low credit score

A decline based on information held at a credit A decline based on information held at a credit reference agency - tell them which one you used and reference agency - tell them which one you used and how to go about applying for a copy of their filehow to go about applying for a copy of their file

A decline based on specific company policiesA decline based on specific company policies

- Over commitment- Over commitment

- Home ownership (for a secured loan)- Home ownership (for a secured loan)

- Under age- Under age

- Not employed- Not employed

- Existing account performance- Existing account performance

Review of refusals and Review of refusals and complaintscomplaints• A rejected applicant must be informed A rejected applicant must be informed

of the proper procedures if appealing of the proper procedures if appealing

on a decision based on a credit scoreon a decision based on a credit score

• Credit grantors should reconsiderCredit grantors should reconsider

the application if relevant the application if relevant

additional information suppliedadditional information supplied

• A different lending officer A different lending officer

should review the applicationshould review the application

Review of refusals and Review of refusals and complaintscomplaints

• Designated officer in place for Designated officer in place for appeals - authority to override the appeals - authority to override the original decision original decision

• Credit grantors should keep their Credit grantors should keep their appeals procedures under continual appeals procedures under continual reviewreview

• Credit grantors should establishCredit grantors should establish complaints procedures and inform complaints procedures and inform customers about them if they wish customers about them if they wish to complainto complain

SummarySummary

• Credit scoring is the fastest and fairest way of Credit scoring is the fastest and fairest way of making a decisionmaking a decision

• A low score is not always adverse CRA dataA low score is not always adverse CRA data

• Don’t be secretive, be open and honestDon’t be secretive, be open and honest

• Take responsibility for the decisionTake responsibility for the decision

Why use monitoring?Why use monitoring?

Monitor/Evaluate

Tune/Build Scorecards and

Strategies

Implement

Integrated solutionsIntegrated solutions

• Ensure scorecard Ensure scorecard performs optimallyperforms optimally


Dynamic delinquencyDynamic delinquency

ApplicationDate

Q3 2000 0.5% 1.1% 2.0% 3.6%

3 months 6 months 9 months 12 months

Age of account

Q4 2000 0.5% 1.2% 2.2% 3.7%Q1 2001 0.6% 1.3% 2.1% 3.5%

Q3 2001 1.4% 2.3%

Q2 2001 0.5% 1.2% 2.0%

Q4 2001 1.3%

Dynamic delinquencyDynamic delinquency

ApplicationDate

Q3 2000 0.5% 1.1% 2.0% 3.6%

3 months 6 months 9 months 12 months

Age of account

Q4 2000 0.5% 1.2% 2.2% 3.7%Q1 2001 0.6% 1.3% 2.1% 3.5%

Q3 2001 1.4% 2.3%

Q2 2000 0.5% 1.2% 2.0%

Q4 2001 1.3% New communication strategy

Misalignment reportMisalignment report

Score Total

to 850 2:1

851-900 4:1

901-950 7:1

951-1000 13:1

1001+

Owner

2:1

5:1

8:1

12:1

22:1

Tenant

1:1

2:1

4:1

9:1

17:1

LWP

3:1

4:1

7:1

14:1

21:1 21:1

Other

2:1

4:1

7:1

12:1

20:1

Residential Status

• Ensure scorecard performs optimally

• Identify changes in applicant profile


Applicant population Applicant population stabilitystability

Married 54 48

Single 32 41

Widowed 3 3

Divorced 9 7

Separated 2 1

% of Applicants

Marital status Development Current

Applicant population Applicant population stabilitystability

Married 54 48

Single 32 41

Widowed 3 3

Divorced 9 7

Separated 2 1

-11%

+27%

% of Applicants

Marital status Development Current

• Ensure scorecard performs

optimally

• Identify changes in applicant

profile

• Identify sources of good/bad

business


Source of businessSource of business

Application Date

% FromDirect Mail

% From Media Advertising

00 Q2 37 6300 Q3 39 6100 Q4 38 6201 Q1 39 61

New Communications Strategy

01 Q2 29 7101 Q3 30 7001 Q4 31 69

Source of businessSource of business

Application Date

% FromDirect Mail

% From Media Advertising

00 Q2 37 6300 Q3 39 6100 Q4 38 6201 Q1 39 61

New Communications Strategy

01 Q2 29 7101 Q3 30 7001 Q4 31 69

(Ave score = 950)(Ave score = 950) (Ave score = 910)(Ave score = 910)

• Ensure scorecard performs optimally

• Identify changes in applicant profile

• Identify sources of good/bad business

• Referral analysis


Referral analysisReferral analysis# Accepts # Rejects Reject rate

Not referred 14,000 6,000 30%

ReferralsAge <21 1,000 1,000 50%

Unemployed 500 500 50%

Address notconfirmed

500 1,500 75%

Total 16,000 9,000

what is credit scoring

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